Starboard chief Smith steps in at Papa John’s

(Reuters) – Hedge fund Starboard Value LP has picked up a $200 million stake in Papa John’s International Inc and its Chief Executive Officer Jeffrey Smith will take over as chairman of the No. 3 pizza chain in the United States, the company said on Monday.

Smith will take over the role, that until last July, was held by Papa John’s founder John Schnatter, who resigned following reports that he had used a racial slur on a media training conference call.

Shares of Papa John’s pared most of its premarket gains, and were last up 6.5 percent at $41, following preliminary fourth quarter results that Chief Executive Officer Steve Ritchie admitted were “disappointing”.

Starboard’s initial $200 million investment equates to about 11 to 15 percent of Papa John’s outstanding shares as of the stock’s closing price on Friday.

Papa John’s says it intends to use about half the proceeds to repay debt.

The deal includes an option to receive an additional $50 million from Starboard through March 29, 2019.

Reuters reported on Friday that Papa John’s was seeking to sell a stake in the company after outright acquisition offers from private equity firms did not meet its valuation expectations.

The pizza chain is locked in a battle for control with Schnatter, who owns about 30 percent of the company and still retains a seat on the company’s board.

The agreement with Starboard was in the best interest of shareholders following an evaluation of a wide range of strategic options, Papa John’s said.

The company also appointed its own CEO Stever Ritchie and former Pinnacle Entertainment head Anthony Sanfilippo to its board, bringing the total number of directors to nine, seven of whom are independent.

Papa John’s expects system-wide North America same-restaurant sales to fall 8.1 percent in the fourth quarter and its full year profit to be at the lower end of its previous forecast.

The sales have been falling for over a year as the company battles for market share with larger rival Domino’s Pizza and Yum Brands’ Pizza Hut.

It is, however, spending heavily on revamping its advertising and brand to counter the bad publicity following the Schnatter controversy.

Papa John’s removed Schnatter as the brand’s spokesperson and also took his image off its pizza boxes last July and launched a third-party audit into the brand’s culture.

Schnatter has been seeking internal documents to try to show the company was mismanaged and to determine if he was improperly pushed out.